Discussion
What does L stands for in LAF?
Answer: B
Correct answer: Liquidity
LAF is the Liquidity Adjustment Facility, the Reserve Bank's principal instrument for managing day-to-day liquidity in the banking system.
Banks borrow from the RBI against government securities under repo when they are short, and place surplus funds under reverse repo when they are long. The repo rate is thereby the policy rate, and the corridor between repo and reverse repo bounds the overnight call money rate. The name says what it does: it adjusts liquidity, as distinct from the structural absorption of the cash reserve ratio.
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